On May 26, 2022, the Office of the Superintendent of Financial Institutions (OSFI) issued a draft version of Guideline B-15: Climate Risk Management (Guideline). The Guideline represents the latest in a series of developments that demonstrate OSFI’s forward-looking approach to managing plausible risks of climate change facing federally regulated financial institutions (FRFIs) and more broadly, the economy.
The Guideline broadly categorizes climate-related financial risks into two spheres: physical and transition risks. Physical risks refer to those financial risks that may derive directly from gradual and acute changes in climate (including extreme weather events). Transition risks relate to financial risks deriving from growing regulatory and social pressures to adjust to a low-greenhouse gas economy. To manage these climate-related risks, the Guideline focuses on two areas: (i) governance and risk management expectations; and (ii) climate-related financial disclosures.
The Guideline’s governance and risk management expectations sets out governance principles expected to be incorporated into the business model, policies and procedures of FRFIs. These include the need to consider the impact of climate change on an FRFI’s short-term and long-term financial plans, and that climate-related risks should factor into senior management compensation. Risk management principles include the need to mitigate the physical impact of climate change and the potential for such disasters on its critical operations, including through developing a business continuity and disaster recovery plan. Alongside operational preparedness and resilience, OSFI highlights the need for FRFIs to develop their capabilities in climate risk monitoring, and to aggregate and internally report climate risk data to address certain risk concentrations (e.g., geographies or products).
The Guideline’s climate-related financial disclosure regime sets out a requirement for annual disclosure. The principles to guide the disclosure include the need for relevant information (e.g., potential impact on cash flows and markets, and degree of exposure), which should also be presented in a manner that is clear, balanced, specific, and complete (i.e., comprehensive, by including both historical and future-oriented information). “Boilerplate” or generic disclosures should be avoided.
FRFIs will be expected to implement the disclosures required under the Guidelines for fiscal periods ending on or after October 1, 2023, and are expected to make the disclosures public (e.g., on the company’s website) no later than 180 days after the FRFI’s fiscal year-end. There is no prescribed form for the disclosure and as such a ‘flexible’ approach suited to the FRFI may be taken to present the information. The location for the disclosure is likewise discretionary, and may be included in, for example, a report to the shareholders.
The comment period for the draft Guideline will close on August 19, 2022, with the final version expected to be released by early 2023.
If you have any questions or are interested in learning more, please contact us.
June 30, 2022